Department of Revenue study shows income tax cut would not pay for itself

LINCOLN — A $100 million income tax cut would not generate enough economic growth to pay for itself, a tax burden study released Wednesday by the Nebraska Department of Revenue shows.

A hypothetical $100 million personal income tax cut would result in a net loss of $95 million in tax revenue and largely benefit Nebraskans with the highest incomes, the study found. According to the study, the majority of the income tax reduction — 67 percent — would go to households making $100,000 or more, (see table 10 on page 20 of the report) roughly the wealthiest 20 percent of Nebraskans (see table 3 on page 10 of the report). Furthermore, the top 7 percent of households (over $150,000) would get almost half (49.08 percent) of the income tax cut.

“The Department of Revenue study shows the increased economic activity generated by an income tax cut would not be near enough to pay for itself in terms of increased state revenue,” said Renee Fry, executive director for the OpenSky Policy Institute. “This means cuts to education, health care and other vital services or increases in other taxes would be required to offset the revenue losses created by an income tax cut.”

The study also found that a $100 million sales tax cut would actually generate more economic activity than an income tax cut of the same size but also would not come close to paying for itself in terms of increased state revenue.

Some of the income tax cut may leave the state as “individuals seek investment opportunities, not only within the state, but also in other states and other countries,” the study found. (Page 19)

The study also shows that the actual income tax rate paid by most Nebraskans — including those with the highest incomes — is lower than the state’s top rate of 6.84 percent. For example, the effective income tax rate paid by the state’s top 500 earners in 2014 was 3.95 percent (see table 13 on page 24 of the report).

Below are some excerpts from the report:

On income tax cut leaving the state

“Nevertheless, an extra portion of savings may not directly relate with investment in Nebraska since individuals seek investment opportunities, not only within the state, but also in other states and other countries.” Page 19

On income tax cuts benefiting higher income groups

“It implies that a tax policy, which reduces the income tax rate, would have more economic benefit for higher income groups.” Page 20

On why top 500 returns pay lower effective tax rate than the top 10th decile

“The top 500 resident returns are much more likely to report pass-through income from business investment. Therefore, taxpayers are also much more likely to report large amounts of capital gains from the sale of businesses or business assets. In addition, these taxpayers are also more likely to have benefited from Nebraska’s economic development programs — including the Employment and Investment Growth Act (LB 775) and the Nebraska Advantage Act (LB 312) — reducing tax liability for individuals.” Page 25

Contact Chuck Brown at 402-610-1522 or cbrown@openskypolicy.org for more information.

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